I’ve always had a passion for business. No matter how much experience I get, there is always more to learn, more to accomplish. The mix of personality, drive and innovation in business leaders mixed with market demand, the economy, competition, government and the world around us makes for a fresh challenge requiring fresh approaches every day. What fun!
From 1884 to 2006, I was CEO and co-founder of Bentley Publishing Group, a privately held firm based in Walnut Creek, Calif. until I founded my mid-market consulting firm, CEO to CEO.
I’ve published extensively on the successful leadership traits of CEOs of mid-market companies, and wrote the book, The Feel of the Deal and soon my newest book, Mighty Midsized Businesses: How Leaders Overcome 7 Silent Growth Killers, due September 16th, 2014.
CEO to CEO is a consulting firm of former chief executives that improves the leadership infrastructure of midsized companies that are pursuing higher performance.
Website: www.ceotoceo.biz E-mail: R.Sher@ceotoceo.biz

Legal Lessons for Mid-Sized Firms from the Apple-Samsung Patent War

Justice is generally not served when a big company does battle with a middle market company. Legal fees can crush the mid-market company long before any “just” outcome occurs. Thus every mid-market company should be nervous over the recent headlines on the patent war between AppleApple and Samsung: a U.S. court last month ordered Samsung to pay Apple $1 billion for infringing on six technological patents.

Do you think such patent wars only pit big companies against other big companies? Think again. Here is just one example of a mid-market company that had a really bad outcome from intellectual property litigation. A big firm litigated against a mid-sized technology firm through the International Trade Commission in parallel with a U.S. court lawsuit, claiming patent infringement. The smaller company disputed the claims, retaining a large, well-reputed law firm to defend it vigorously. The legal fees for the first eight to nine months approached $10 million. At that point, the company moved to change law firms, but the legal fees had already exceeded its allotted budget. The mid-market company came to the conclusion that the escalating legal fees weren’t worth it. They gave up and settled the litigation.

For public companies, the cost of litigation has exploded. A Boston University School of Law paper by James Bessen and Michael Meurer, “The Patent Litigation Explosion,” notes that between 1987 and 1999, the cost of litigation as a percent of R&D spending soared 70% for public companies on the defendant side of the courtroom. A 2004 study by professors Jean Lanjouw and Mark Schankerman found that “the risk of litigation falls disproportionately on smaller firms.”

To avoid legal battles they can’t win, CEOs of mid-market firms must understand the rules of engagement: 1. Resist the temptation to infringe. When technical challenges mount and competitive and financial pressures grow acute, some companies may be tempted to take a short cut and copy an invention that works. I wrote about resisting the pull five years ago, “Avoid the Slide to the Dark Side”. Yet even with the best intentions, companies can infringe on the patents of others. Programmers can “borrow code” without permission; may infringe on designs they thought were original because no patent check was performed. Make sure your company builds systems and processes to monitor internal activity and risk. The cost will be much lower than a huge legal bill, or worse, a judgment of patent infringement. 2. Pick your legal fights carefully. Whether choosing to sue or aggressively defend, pick only those battles in which you can afford to mount a fair fight. It is imprudent to knowingly irritate a big firm — even if you are likely to be found right. Once the battle starts, it takes both parties to end it. The cost is not merely financial: diversion of executive time and attention is significant and the core business often suffers. 3. Surrender gracefully. When the odds look long and threaten your business, it may be best to turn the other cheek. This can be very difficult, especially when you are clearly in the right. But litigation is and must be about business, not about emotion or principles. Read “Surrendering Gracefully” for more on this difficult decision. 4. Have good advisers—legal and otherwise. A great board, a law firm that you’ve worked with, and a strong general counsel are invaluable to making good decisions throughout the process. Read my thoughts on best practices in use of advisers.

Just as important: make sure your law firm is not trying to make legal history if the risks to your company are too great. Garner Weng, IP partner at the mid-market Northern California law firm Hanson Bridgett LLP, says, “As a lawyer, it’s interesting and exciting to take on a lawsuit in a cutting-edge area. But we know that not every client wants to make ‘new law’ and not every dispute is a good ‘test case.’ Our view is that the business strategy and business goals should be tied intimately to the legal strategy and legal goals.”

To a mid-market firm, the risks of waging legal war with a big firm can be enormous. Taking the steps to keep out of expensive litigation must be a high priority.

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From my perspective, the danger of using a patent attorney’s opinion to decide on a course of action, when one is not familiar with the process, is their natural bias towards process-heavy solutions (= expensive), not just because of their own financial motivations, but simply due to a professional bias and passion for the infinite possibilities they can uncover …. which can also lead to a seemingly quasi-infinite drain on the purse. Yet they are the expert and their expertise is needed.

A good option indeed is to gain the advice of on someone who really does understands the patent protection or infringement issues, without being too involved with, too cut off in, the mechanics. A business person more than an attorney. Probably someone who has gone through it before and had to discover and uncover the process. I can think of a couple of people in my network that fit that description. What’s not reassuring is that in both cases they do regret their course of actions. Any other thoughts Robert? You would certainly be a person I would call early…

Your point is well made that a prime consideration when thinking about patent litigation is one of business strategy–whether plaintiff or defense. I would most certainly try to find some peers with relevant experience. But I wouldn’t discount all lawyers. Good lawyers do see the strain on their clients and do take into account the business outcomes for their clients. Much as one lawyer can be expensive, getting a second lawyer (in a different firm) who knows they are not going to try the case can be helpful too. A second opinion–especially about the broad wisdom of a course of action (as opposed to analyzing the patent) may cost a few thousand, but that’s cheap compared to the actual costs of litigating.

It is also important to note that the outcome of many patent litigations is not a pile of cash and complete ownership of all your rights. Many end as settlements, with some cash transferred and licenses extended. A patent cause yet-to-be litigated has one level of future value. A litigated patent has a known current value and often less potential future value.

As a UK Patent holder I have learnt the hard way that a Patent is not worth the paper it is written on. Governments award/charge yearly for Patents but then allow only rich organisations to be able to defend against infringement. The Patent Attorney/Lawyer costs to even start the process made my eyes water! Patent Law (I suspect all law) was written on the behalf of the ‘Rich/Powerful Peer Group’ to ensure they stay in control of the financial cream. Why have/ do we, the majority, allow the few to screw the rest of us?

Your 4 rules of engagement are very helpful. And this line stuck me as one of the devastating consequences of these law suits that many probably overlook, “diversion of executive time and attention is significant and the core business often suffers”.